I was wondering if anyone could share if they know much about measuring performance of a PE fund from a fund of funds perspective. After they have included the fund in their portfolio, what are some things they look at to gauge performance? What are some good qualities they would look for in a candidate?
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IRR and MoIC of individual deals Are new deals proprietary or sourced through auction/banker
combination of both
net MOIC is by far the most important - irr is only really helpful for the managers, to determine if they are going to get carry (they will normally have a 8% preferred return that they need to acheive across the fund).
Frequency and consistency of liquidity events is something that our investors massively bang on about.
Private Equity Performance (Originally Posted: 04/16/2014)
Dear all,
Currently doing research on private equity for my bachelor thesis. My main interest is in private equity. Idea is to write my thesis about a PE related topic. Only a high grade can be obtained if you can "add something to existing literature". Have done some thorough research, but now I get a little stuck.
Talked about this with a PE worker from this forum (thanks a lot). My idea is to map US buyout performance to the performance of the S&P500 using the ThomsonOne database. However, this has already been researched a couple of times before. The addition to existing literature could be to compare the relative performance of PE buyout funds to the S&P500, during crisis and non-crisis periods. Total period 1985-2012. Recessions included: 1990-1991 , 2001-2002 and 2008-2009.
Method: Comparing the returns of buyout funds with vintage years during these crisis periods with funds with vintage years during non-crisis years. OR Compare overall performance during crisis vs. non-crisis periods. What do you think is the best approach?
There has already been done quite a lot of research about market cyclicality, but not found a paper which compared relative performance during crisis and non-crisis periods.
What do you think about this idea? If you have any other suggestions / additions, please let me know!
Thanks in advance!
I'd just throw in a warning when it comes to doing non-doctroral theses on PE performance. The available data is usually rare, flawed and self-selected. Basically no fund is required to submit data into any database so especially poor performance will not be very frequently shown there. The most prominent academic research on PE is very often based on data that the researchers get from pensions funds, etc. Don't take it as discouragement but just be aware of it before you commit.
To your actual question, I would try to look into vintage years and compare both crisis and non-crisis vintages but also across the three different crises. Also keep in mind that probably not the 2009 funds are f*ked but more the 2006-2007 funds since they bought a lot of assets pre-crisis.
Hope this helps.
Thanks a lot for your repsonse.
Some problems I immediately see: 1) IRR vs. time weighted returns. I guess you could assume same cumulative cash flows into and out of the S&P 500 over same period for a semi-apples to apples comparison? You are going to run into this problem anytime you compare public/private investments. 2) Say you choose 06/07 funds for the 08/09 recession...these funds are going to be deep in the j-curve anyways (just calling capital and taking fees) so kind of pointless to compare to S&P 500. Think it might make more sense to choose a benchmark that is diversified by vintage year? 3) Small sample size in 90/91 4) Not sure how you would use any conclusions from this analysis. You can't predict bear markets regularly, you can't control when funds call capital. If you somehow conclude that PE performs worse in down markets, how does that information help anyone? Everyone already knows that it's a volatile asset class, and most are in it for outsized returns/returns in excess of public markets over full cycle, not downside protection.
Seems like a lofty undertaking. I would consider doing something more focused. For example, did small/mid-cap buyouts that fundraised prior to the 08/09 recession outperform mega-cap buyout funds due to having more portfolio companies (diversification)? Maybe not a great example, but I think you get the idea.
Thanks a lot for your reaction! This is actually where I get stuck: it actually is not very informative to anyone. Since I already read already a lot of PE related articles, and deadline is next week, I cant change subject. Because of this, and my interest, I would like to stay focussed on PE.
One question: isn't it the case that mega-cap buyout funds have a larger portfolio, instead of the small-cap funds?
I do like your suggestion. Based on your suggestion and my thoughts I came to the following idea, that might result in a more interesting question and a better thesis: - focus on the crises of 2001-2002 and 2008-2009 - compare the returns of buyout funds with vintage years in the period 2 years before the crises with returns of buyout funds with vintage years in the crisis years. As I expect, returns of funds with vintage years before the crisis are lower, since they have invested in assets which dropped in value dramatically. - try to make a difference between small - mid cap and large-mega buyout funds. As I expect, the returns of the mega buyout funds would be more stable, since they have a more diversified portfolio.
Should I only use liquidated funds in this research?
What do you think about this setup. Better than previous one?
What are the common valuation metrics on private equity funds (Originally Posted: 08/06/2015)
Anyone knows what are the common valuation metrics on private equity funds, like i know AUM is a good measure of private equity funds by summing up their portfolios. But how about multiples? like Market Cap to AUM, but it seems this is just for listed pe firms.
Not exactly sure but I guess Price to Book Value and Price to Free Cash Flow can be used.
Out of the Price to Book Value vs Free Cash Flow which one is better?
Yea probs using market cap to AUM but not much PE firms are listed coz i just wonder what kind of metrics can i use if i want to know how much does a PE firm worth.
The few publicly traded funds run multiple strategies and the ways that they structure their publicly traded entities are complicated so it would be pretty difficult to run any sort of analysis on their actual private equity portfolios based on market cap to AUM, and most PE isn't publicly traded.
AUM describes the size of the funds. It's all about returns which are very typically and not surprisingly private. Calpers posts a decent picture of returns: https://www.calpers.ca.gov/page/investments/asset-classes/private-equit…
Just saw this article saying, still nt sure about the private equity firm valuation
As a result, private equity firm valuations have been almost entirely based on management fees, to the exclusion of performance fees. Just take a look at target prices for Blackstone BX -1.31% stock today: In most cases, they are calculated by stripping out the value of investments and cash on hand, and then applying a comparable multiple to what’s left (i.e., recurring management fees). In other words, the second revenue stream is being ignored.
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